1. Field of the Invention
This invention relates to data processing systems for managing investment accounts. More particularly, the present invention relates to systems and methods to implement an investment portfolio rebalancing system.
2. Description of the Related Art
Modern portfolio theory is based on diversification. Investment funds are selectively distributed across a spectrum of investments of varying risk. The primary purpose of diversification is to manage risk. Young investors looking for high returns at high risk will generally allocate a larger portion of their portfolio to growth and international stocks while older and more prudent investors will favor bonds and blue-chip stocks. This requires that the investments be carefully monitored, however, because market fluctuations will change the initial allocation over time and therefore cause the investor to be invested in a risk category to a degree that he may no longer be comfortable with.
In general, three risk allocation strategies are in widespread use and are usually referred to as “Buy and Hold”, “Constant Mix”, and “Constant Proportion” strategies. In the “Buy and Hold” schema, investments are made and the investor holds on to them for the long term. In the “Constant Mix” scenario, the investor determines what the asset allocation will be and periodically adjusts his portfolio accordingly by selling and buying in his investments to as to rebalance back to the original allocation. In the “Constant Proportion” strategy, the investor establishes a floor value for the portfolio (the minimum value that the portfolio will be permitted to fall to) and also establishes a constant that determines the level of investment in the high-risk investments (usually stocks).
In addition to spreading risk, most investors would or should follow the adage to “buy low and sell high.” In actual practice, few have the discipline to sell off investments when they are riding high or to buy into investments when they are low.
A need therefore exists for an automated process that addresses both the desire of the investor to maintain his risk allocation among risk groups as well as the need to sell investments after they have increased in value and to buy investments after they have fallen in value.